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Mortgage Lending at Community Banks

Community banks offer tailored mortgages to homebuyers in local communities throughout the country. Many community banks hold those mortgages in their portfolio for the life of the loan.

When a bank holds a mortgage loan in its portfolio, it retains the full risk of default. Thus, community banks engaged in portfolio lending are fully motivated to make sure the borrower is able to repay the loan. Additionally, if a homeowner defaults, community bank portfolio lenders are compelled to work with the borrower to fix the problem.

This makes the interests of borrowers and community bank portfolio lenders are inherently aligned.

Just like small business loans, community banks leverage local and personal expertise when making home loans. They can tailor a loan to a borrower’s particular circumstances, knowing the homebuyer, the property, and the real estate market in question.

But more and more, community bankers are finding it increasingly challenging to operate according to their traditional relationship-lending business model. 

The mortgage lending market for community banks has been pressured due to regulatory changes and increased competitive pressures over the past two years.  There have been positive changes to Qualified Mortgage, or QM, rules, but many banks have reduced their mortgage lending.

Even so, community banks typically want provide mortgage loans as a service to their customers, even if mortgage operations are not profitable enough to be a main source of net income.

This is why CSBS and state regulators support legislation allowing for QM status for any mortgage held in portfolio by a community bank.

Despite a de-emphasis on mortgage lending as a primary business line, the majority of community banks will continue to operate in the mortgage space.  According to the CSBS-Federal Reserve survey of community banks for the 2015 research conference, 48 percent of community banks plan to maintain the level of their mortgage operations in 2015, while only 17 percent plan to decrease their mortgage lending volume.